European Banking Monitor: Switching From Bullish To Bearish

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .

---

Last week's risk monitor argued for being cautiously opportunistic on the long side as the interbank risk measures remained benign, Euribor-OIS & TED Spread, in spite of the growing concern around EM market and currency risks. This week is a different story. On Friday of last week we saw the Euribor-OIS spread hockey stick higher. We also saw a notable upward move in the TED Spread. These have historically been two of the most accurate risk gauges in signaling when to move from an aggressive to a defensive posture. They're indicating fairly clearly now that the situation is deteriorating. Couple that with our quantitative line of intermediate-term support (TREND: $21.36) in the XLF being broken, and there are clear, bright-red warning signals flashing. We'll heed them until they tell a different story.

European Financial CDS - Swaps were slightly wider, on average, across European banks last week, but, looked at on a month-over-month basis, continue to push higher. Italian banks are showing some of the worst performance on a month-over-month basis.

Euribor-OIS Spread – The Euribor-OIS spread widened by 5 bps to 16 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.

Matthew Hedrick

Associate

Share

Print

02/03/14 11:25 AM EST

Just Charts: Dog Breath

Last week was another difficult week for consumer stocks, with the XLP down -1.74% versus the SPX down -0.43%. The Hedgeye U.S. Consumption Model is flashing predominantly red, as only 3 of the 12 metrics are flashing green. Please see the table below for more detail. Although personal spending turned green last week, it comes with a caveat – it is being driven primarily by re-leveraging, as the personal savings rate fell to the lowest level since 2008 (3.9%).

The Macro team’s 1Q14 theme of #InflationAcceleratingcontinued to play out last week and manifested itself in the form of slower growth. There were plenty of red flags for growth in December and things appear to have slowed further in January.

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one. As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

Herbalife (HLF) announced this morning that it will boost its share buyback by 50% to $1.5 billion and offer $1 billion in convertible senior notes.

We still like the stock on the long side from a trading perspective – the company clearly has the cash to protect the stock, key activist investors remain poised on the other side of Ackman’s short bet, no government agency appears ready to open Pandora’s box on the multi-level-marketing industry, and any claims that Ackman may have against HLF’s China business as a pyramid scheme (expected to be presented this month) may be at best immaterial: 1) they will be hard to investigate given the lack of transparency in China, and 2) HLF can afford to cut its exposure to China, which is only ~11% of sales.

Altria (MO) announced this morning it’s in agreement to acquire the e-vapor business of Green Smoke for $110M in cash.

This is a key signal that Big Tobacco is looking to play catch-up for e-cig market share. LO was first out of the box with its acquisition of Blu in April 2012, then bought UK-based e-cig manufacturer SKYCIG in October 2013 to expand internationally. Both MO and RAI were late to the e-cig “party”, rolling out their own e-cig brands (MarkTen and Vuse, respectively) only in late 2013 in test markets, with plans for national distribution by mid-year. A wild card on the future direction of the industry remains the FDA. We’d expect it continues to drag its feet, balancing the need to protect the consumer while promoting harm reduction of traditional tobacco. We’re bullish on e-cigs and see moves to consolidate as conviction from Big Tobacco that the category is here to stay.

POST announced this morning it has agreed to buy the PowerBar and Musashi sports brands from Nestle for $550 million.

We’re bullish on CEO William Stiritz’s push to transform the portfolio to meet consumer trends of health (fitness) and wellness. This adds to such brands as Premier Nutrition supplements and Hearthside Food Solutions’ organic cereals and snacks that were acquired since Post was spun off from Ralcorp in 2012. Note: Stiritz also holds a 7.4% stake in HLF, and has said he’s willing to take part in a leveraged buyout of the company.

Earnings Calls This Week (in EST):

Tuesday (2/4): ADM 9am; CHD 10am; HAIN 4pm

Wednesday (2/5):EL 9:30am; CCE 10am

Thursday (2/6):K 9.30am; PM 1pm

Howard Penney

Household Products

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

(o)

ALCOHOL

BUD – doesn’t look much healthier than DEO or MO now either; has moved from bullish to bearish TREND in the last month; TREND resistance = 101.28

DEO – looks just like MO – no more TREND mo mo as TREND reverses from bullish to bearish w/ $127.96 TREND resistance

BEVERAGE

KO – you’d think the consumer and emerging market world was ending looking at some of these charts; big time bearish breakdown confirmed here this week; TREND resistance = 40.19

Right Said the TED Spread

Takeaway:While not yet at alarming levels, interbank lending rates are increasing - a negative, on the margin, for liquidity and counter party risk.

We’ve used this play on words before when referring to the Ted Spread. “Right Said Fred” is an English based band formed by the brothers Richard and Fred Fairbrass in the last 1980s that is most well known for the hit single, “I’m Too Sexy.” While following interbank lending rates isn’t exactly sexy, we’d be remiss if we didn’t highlight the recent acceleration in the Ted Spread domestically and the Euribor-OIS spread overseas.

Just as a refresher, the TED Spread is the difference between interest rates on interbank loans and short-term U.S. government debt (effectively the risk free rate). Overtime, the TED Spread usually ranges between 10 and 50 basis points. In the financial crisis of 2008, the TED Spread eclipsed 450 basis points. This exceeded the previous record of 300 basis points after the Black Market crash of 1987.

An expanding TED Spread implies that liquidity is being withdrawn from the system and is therefore seen as a precursor to equity market declines. More broadly, it is seen as an indicator of perceived risk in the general economy. In effect, as the spread increases it is a sign that lenders believe the risk of default on interbank loans, or counterparty risk, is increasing.

In the chart below we highlight the recent movements in the TED spread and the Eurbor-OIS spread, which is the daily reference rate at which Eurozone banks offer to lend unsecured funds to other banks in the European interbank market. Clearly, we are not yet in a danger zone for either, but both have been accelerating on a percentage basis over the past weeks. The Eurobor-OIS spread widened by 5 basis points to 16 bps last week and the TED Spread rose 2.7 basis points to 21.4.

In part, these spreads widening have led our Financials team to turn bearish on their sector this morning. As Sector Head Josh Steiner wrote in his Monday Morning Risk Monitor today:

“Last week's risk monitor argued for being cautiously opportunistic on the long side as the interbank risk measures remained benign, Euribor-OIS & TED Spread, in spite of the growing concern around EM market and currency risks. This week is a different story. On Friday of last week we saw the Euribor-OIS spread hockey stick higher. We also saw a notable upward move in the TED Spread. These have historically been two of the most accurate risk gauges in signaling when to move from an aggressive to a defensive posture. They're indicating fairly clearly now that the situation is deteriorating. Couple that with our quantitative line of intermediate-term support (TREND: $21.36) in the XLF being broken, and there are clear, bright-red warning signals flashing. We'll heed them until they tell a different story.”

Our Macro Team will be doing an update call on the U.S. economy on Wednesday at 11am, at which point we will dig deeper into the implications of the emergent expansions in the TED and Eurobor-OIS Spreads. Dial in instructions will be circulated head of the call.

GET THE HEDGEYE MARKET BRIEF FREE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

02/03/14 11:13 AM EST

$WTW: Short the Barron's Bounce

Takeaway:This is a great opportunity to short WeightWatchers (WTW) following the expected ‘Barron’s Bounce.'

Mr. Market is offering investors a great opportunity to short WeightWatchers (WTW) following the expected ‘Barron’s Bounce’ this morning.

Shares of WTW were flashing green amid a sea of market red after the financial publication posted a bullish note over the weekend on the heels of our secular short call.

Hedgeye analysts Tom Tobin and Hesham Shaaban released a distilled dive video on Friday laying out our secular short thesis. We believe a game-changing technological paradigm shift is underway which is prompting new entrants into the space and undercutting WTW's price and value proposition.

.

Our Google Trackers suggest that interest in WTW services is decelerating meaningfully. Our estimates suggest that 1Q14 could experience the slowest sequential member increase in the last 7 years

MONDAY MORNING RISK MONITOR: SWITCHING FROM BULLISH TO BEARISH

Takeaway:We're moving from Bullish to Bearish on the Financials as systemic interbank risk is rising and quantitative support on the XLF is broken.

Summary:

Last week's risk monitor argued for being cautiously opportunistic on the long side as the interbank risk measures remained benign, Euribor-OIS & TED Spread, in spite of the growing concern around EM market and currency risks. This week is a different story. On Friday of last week we saw the Euribor-OIS spread hockey stick higher. We also saw a notable upward move in the TED Spread. These have historically been two of the most accurate risk gauges in signaling when to move from an aggressive to a defensive posture. They're indicating fairly clearly now that the situation is deteriorating. Couple that with our quantitative line of intermediate-term support (TREND: $21.36) in the XLF being broken, and there are clear, bright-red warning signals flashing. We'll heed them until they tell a different story.

* U.S. Financial CDS - Citi continues to lead the charge among the large cap banks as north of 40% of its revenue comes from Emerging Markets. Its swaps widened 6 bps vs last week and are now 23 bps wider month-over-month. Mortgage insurers, MTG & RDN, both saw sizeable upticks in their swaps week-over-week as well. The insurance complex is also buckling amid falling rates.

1. U.S. Financial CDS - Swaps widened for 23 out of 27 domestic financial institutions. Citi continues to lead the charge among the large cap banks as north of 40% of its revenue comes from Emerging Markets. Its swaps widened 6 bps vs last week and are now 23 bps wider month-over-month. Mortgage insurers, MTG & RDN, both saw sizeable upticks in their swaps week-over-week as well. The insurance complex is also buckling amid falling rates.

Tightened the most WoW: TRV, JPM, SLM

Widened the most WoW: AIG, MET, HIG

Tightened the most WoW: AGO, MBI, MTG

Widened the most MoM: C, AXP, GNW

2. European Financial CDS - Swaps were slightly wider, on average, across European banks last week, but, looked at on a month-over-month basis, continue to push higher. Italian banks are showing some of the worst performance on a month-over-month basis.

3. Asian Financial CDS - It was a mixed week for Asian Financial CDS as swaps were mostly wider across China, Japan and India, but a few banks posted substantial tightening.

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 5 bps to 16 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.

11. Markit MCDX Index Monitor – Last week spreads widened 13 bps, ending the week at 90 bps versus 77 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

12. Chinese Steel – Steel prices in China were unchanged last week but remain down 2.7% month-over-month at 3,404 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

13. 2-10 Spread – Last week the 2-10 spread tightened to 232 bps, -6 bps tighter than a week ago. The yield spread is now 29 bps tighter month-over-month. We track the 2-10 spread as an indicator of bank margin pressure.

14. XLF Macro Quantitative Setup – Quantitative lines of support in the XLF are now broken on both a TRADE (short-term) and TREND (intermediate-term) basis. Our Macro team’s quantitative setup in the XLF shows 3.0% upside to TRADE resistance and 2.1% downside to TRADE support.

Risk Managed Long Term Investing for Pros

Thank You!

Your request has been received

You have been added to our list and will receive an email shortly.

If you do not receive an email, please check your spam filter, and then email
support@hedgeye.com.
By joining our email marketing list you agree to receive emails from Hedgeye. This is a distinct and separate service form any of our paid service products. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.